TiVo – Remember That Box on Top of Your Old TV – Is a Hot Stock Again: But Why?

by Dee GillOctober 17, 2012

DVR maker TiVo (TIVO) is a competition-battered, money-losing tech company whose core assets are patents with less than six years to live. So is it really possible that this is a growth stock?

Hedge funder Steve Cohen seems to think so. His SAC Capital greatly boosted its stake in TiVo to about 5.2% of the company. A whole lot of industry analysts are bullish on the shares too, which has helped the share price gain some 29%-plus in the past 90 days, as seen in a stock chart.

These are interesting endorsements for a company that rarely turned a profit in 13 years. In the early 2000s, TiVo gained verb status with TV-top boxes for recording television. It commercialized the features dearest to viewers’ hearts, like the ability to easily skip commercials and to record and play back different shows simultaneously. But it only really made money by suing the cable and tech companies that allegedly infringed on its patents with competing devices.

DishTV (DISH) and AT&T (T) paid up first. On Sept. 24, Verizon (VZ) agreed to pay $250 million to license TiVo technology rather than fight it over patents in court. This one was big enough to turn 2013 forecasts to profits from a loss to about 80 cents a share. Many believe the Verizon agreement is a sign that other defendants -- Google’s (GOOG) Motorola, Cisco (CSCO) and Time Warner Cable (TWC), in particular – will pony up cash sometime soon too. Simply settling all these actions would help TiVo’s balance sheet immensely. The company expects to spend some $10 million in legal expenses during the third quarter alone.

The profit stream at TiVo has improved greatly in the past year. TiVo subscriptions were up some 41% in the latest quarter, largely on partnerships with overseas content providers like Virgin Media in Europe. TiVo plans more of these partnerships going forward, moving it away from the business of selling directly to the public.

TiVo still faces some big growth obstacles, particularly in the more competitive U.S. market. Here, Apple (AAPL) and others have been working for years on ways to bypass TiVo Inc., and many now have devices of their own. The licensing payments they pay TiVo, litigated or not, are bound to be short-lived, as TiVo’s core patents expire in 2018. TiVo’s reputation of offering a superior product helps it compete now, but that may change when Apple gets its own device into cable and satellite customers’ homes.

At the moment, investors seem to be dismissing these issues. TiVo shares trade at a price to sales ratio of nearly 5. While that’s not unheard of for a growth company, it’s pretty unusual for a company that’s had this kind of growth track record.

What enticement are we missing here? Probably the eternal hope that one of those TiVo competitors will just buy the company outright. TiVo and its bothersome patents make for common takeover gossip, and there are plenty of cash-heavy competitors that could easily afford it. Speculators love to name Apple as a possible suitor, although Apple has never shown much fondness for $1 billion public companies.

So perhaps TiVo is a growth stock. Just not in the ordinary sense of the term.

Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.